CREDIT MANAGEMENT AN IMPORTANT TOOL WITHIN YOUR BUSINESS

report by Marga Ramthun, LIC general secretary

INTRODUCTION

Management shortcomings are one of the major causes of delays of payment: lack of organisation, deficient information systems, underdeveloped computer systems, technical facilities short administrative needs, etc...

Examples of shortcomings on the part of the seller are the absence of a written contract, invoicing delays or mistakes, inefficient monitoring of payments and the lack of a coherent policy on collecting claims.

On the buyer's side, delays can stem from poor organisation of order preparation, receipt of invoices, control of deliveries, authorisation to pay, etc... These management shortcomings are mostly to be found in small firms which are short-staffed and underendowed with management resources.

Beyond traditional training measures, it is necessary to take into account the educational value of computerised business management methods.

WHICH ARE THE SUGGESTED CREDIT CONTROL PROCEDURES?

• Obtain credit rating for all new customers before extending credit
• Establish terms on which trade will be conducted, including setting out clearly the period of credit that will be allowed before payment is due and the amount of credit that will be allowed.
• Ensure that the customer acknowledges the terms in written and ensure that no goods or services are supplied if the customer does not comply with those terms.
• Establish procedures for contacting customers as soon as a debt becomes overdue and adhere to these procedures.
• Where letters, or the equivalent, are sent to the customer threatening that action will be taken, specify a date by which appropriate action is taken at the time stated
• Where trading involves different currencies, ensure that the terms of trade set out clearly the currency which the debt is to be paid, how currency fluctuations are to be deal with (if applicable) and which country's laws are to be applied in the event of litigation.
• Do not wait too much with the recovery of your debts, as your claims might become barred by the status of limitation, which limitation vary from country to country.

WHICH ARE THE SUGGESTED SECURITY METHODS?

• Letters of credit
• Part pre-payment
• Prompt Payment discount policies
• Cash discount
• Bank guarantee
• Credit insurance
• Factoring and forfaiting (the sale of export debts at a discount bank or finance house)
• Bank guarantee
• Associated/parent company guarantee
• Personal guarantee
• Retention of Title
• If your firm does not have the adequate in-house system for debt control, do not hesitate to contact a professional office: Debt collection agency or Lawyer

WHICH ARE THE INTERNATIONAL CONVENTIONS TO BE OBSERVED?

UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS (VIENNA CONVENTION)

The Vienna Convention was issued in 1980 and has been available for countries to subscribe to since then. Is purpose is to provide an uniform body for law surrounding the formation of contracts of sale of goods and how those contracts are carried into practice.

While the convention applies only to international transactions with respect to such transactions it supersedes any provisions of national law if both countries of vendor and purchaser are subscribers to the convention (unless both vendor and purchaser have specifically identified the application of other law, presumably that of the country of one of them).

The convention itself is intended to govern international commercial (not consumer) sales of goods and, among other things, expressly excludes any concern with „ the effect which the contract may have on the property in the goods sold „ that is, it does not enter into consideration of retention of title. Generally the convention also steers clear of consideration of collection and payment, but obviously cannot do so completely.

BRUSSELS CONVENTION

International debt collection has been facilitated by the 1968 Convention on the enforcement of judgements (known as the EC Convention or the Brussels Convention), provisions for which was incorporated into the law of the United Kingdom in 1982, but with actual ratification only on 1 January 1987. Now all community have acceded to it.

Generally, the convention provides for recognition and enforcement in any member state of judgements obtained in any other convention member state. It also requires, as a rule, that one sue in the country of domicile of the defender. Hence a supply will usually have to go to the country o the client to sue.

WHICH ARE THE SOURCES OF TRAINING?

During 1996 LIC „ League International for Creditors e.V." in co-operation with the INFO CENTERS (net-work of consultancy institutions to the disposal of the enterprise and created by the European Commission, DG XX III) and the support of the European Commission DG XX III organised 10 seminars in 9 countries of the European Union (IRLAND, GERMANY, UNITED KINGDOM, SWEDEN, ITALY, PORTUGAL, FRANCE and LUXEMBOURG), on the subject of CREDIT MANAGEMENT and DEBT CONTROL..

The objective of these seminars was to offer to enterprises access to independent advice which improves cash flow by sound credit management. The benefits firms could expect from these seminars are that substantial sums can be saved as a result of new credit policies, as well as computerised business management methods.

PRINCIPLES OF ORGANISATION OF FINANCIAL MANAGEMENT SOFTWARE FOR EUROPEAN SMALL AND MEDIUM-SIZED ENTREPRISES (SME)

Within this context it is important to mention that under the auspices of DG XXIII a steering committee met to promote the necessary reforms in management software packages used by SMEs. The committee agreed with software publishers precise objectives aimed at providing companies by 1 January 1999 with the solutions they require in three areas:

• Full harmonisation between accounting, cashflow management and consolidation software
• Effective control of company management
• Communication, both internal (departments/interface between software packages) and external (customers/suppliers, banks).

We also have to take into consideration the fact, that the single currency will be introduced in January 1999. Software must therefore be designed with a view to the gradual integration of future changes, offering the possibility of a parallel view of two currencies (national and Euro) before finally switching to the single currency. In addition the methods used must be simple enough, and the configuration (VAT, rates, banking conditions etc..) specially designed so that the user is easily able to make the necessary changes without specialist assistance.

RESULTS OF THE LIC'S SURVEY AT THE OCCASION OF THE ORGANIZATION OF THE SEMINARS WITH REGARD TO DELAYS OF PAYMENT IN COMMERCIAL TRANSACTIONS

This survey has been conducted in the countries where the seminars were organised. Various questions with regard to management methods and financial management software packages.

Questions which were replied and analysed were as follows:

Rate of firms requiring assistance/information on CREDIT STANDING ASSESSMENT

• Checklist of an assessment of credit standing............................................... 81%
• Computer - assisted computation of the credit standing index ...................... 46%

Rate of firms requiring assistance/information on ANALYSIS OF BALANCE SHEETS ON THE BASIS OF ANALYTICAL INDEX

• Computer - assisted computation of the term of account receivable............ 36%
• Computer - assisted computation of the term of account payable.................41%
• The determination of the cash flow..............................................................85%

Rate of firms requiring assistance of professional of recovery OUTSOURCING

• Lawyers...................................37%
• Collection agencies...................35%

Rate of firms requiring assistance/information on PC-ASSISTED MANAGEMENT TECHNIQUES

• The computer software should be capable of reconciling accounting results with management results, reconciling invoices with payment flows.....................60%
• The computer software should comply with the quality standard................ 65%

Volume of outstanding debts during 1995

• 58% of the companies have a volume of................................................... 30%
• 26% of the companies have a volume of .................................................. 20%
• 14% of the companies have a volume of .................................................. 50%
• 2% of the companies have a volume of .................................................... 00

Rate of firms requiring assistance/information on EXPANSION ON BUSINESS MANAGEMENT KNOWLEDGE

• Information on creditor's protection .........................................................83%
• Seminars on credit management/credit control ..........................................74%
• Advice in their own firms .........................................................................37%

ABOUT THIS SOURCE OF CREDIT MANAGEMENT ASSISTANCE

In response to the difficulties caused to small business by the late payment of commercial debts, LIC has adopted this best practice guide. Advisory bodies just as professionals like LIC´s members and your INFO CENTER in your region play a vital supporting role to this important sector of the economy.

Paul OBADIA, President of the court in Nice, France summarised in a very humorous way the different habits within the European Union:

• If I was an employee I would stay in France, because it is the most protected country

• If I was a non preferential creditor, I would go to Denmark, because this country has no preference since 1977

• If I had a reservation of title to be applied, I would like to be located in Germany, because it is the country which has the most categories of reservation of title

• If I was a banker I would like to live in Great Britain, because my own administrator could be at the same time the Administrator Receiver

• If I was an old liquidator with a professional experience longer than 12 years I would go the Netherlands because my income would be increased of 30%

• If I had a small enterprise I would go to Italy, because I would be liberated from the law with regard to bankruptcy

• If I was a businessman I would go to Luxembourg, for reasons known to everybody